Metz Industries stock is twice as risky as the market on average. Given an expected return on the market of A. 7.35% B. 16.50% C. 21.50% D. 14.00% 9.5%, and a risk-free rate of 2.50%, according to CAPM, what is the expected return for Metz Industries?

B. 16.50%

Explanation:

We know,

according to Capital Asset Pricing Model (CAPM), the expected return, E (r) = risk-free rate + (expected return on the market - risk-free rate) * beta

Given,

Risk-free rate = 2.50%

Expected return on the market = 9.5%

Beta = 2 (We know market beta is 1. As Metz Industries stock twice as risky as the market on average, the beta of the company is 1*2 = 2.)

Putting the values in to the formula, we can get,

The expected return, E (r) = 2.50% + (9.5% - 2.50%) * 2

E (r) = 2.50% + 7% * 2

E (r) = 2.50% + 14%

E (r) = 16.5%

Therefore, the option B is the answer.